<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549
FORM 10-Q
/X/ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended November 30, 1998
or
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF
THE SECURITIES EXCHANGE ACT OF 1934
Commission File Number 000-20537
WALTER INDUSTRIES, INC.
Incorporated in Delaware IRS Employer Identification No. 13-3429953
1500 North Dale Mabry, Tampa, Florida 33607
Telephone Number 813-871-4811
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months, and (2) has been subject to such filing requirements
for the past 90 days. Yes X No .
--- ---
Indicate by check mark whether the registrant has filed all documents and
reports required to be filed by Sections 12, 13, or 15(d) of the Securities
Exchange Act of 1934 subsequent to the distribution of securities under a plan
confirmed by a court. Yes X No .
--- ---
There were 51,106,092 shares of common stock of the registrant outstanding at
December 31, 1998.
<PAGE>
PART I - FINANCIAL INFORMATION
WALTER INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
November 30, May 31,
1998 1998
(unaudited) (audited)
-------------- ---------------
(in thousands, except share amounts)
<S> <C> <C>
ASSETS
Cash and cash equivalents $ 47,492 $ 54,709
Short-term investments, restricted 128,781 247,463
Marketable securities 5,899 39,064
Instalment notes receivable 4,200,531 4,238,745
Less - Allowance for possible losses ( 25,934) ( 26,221)
Unearned time charges ( 2,874,555) ( 2,894,459)
Trade and other receivables, less allowance for possible
losses of $8,029 and $7,133, respectively 211,476 224,691
Inventories, at lower of cost (first in, first out
or average) or market:
Finished goods 173,114 205,516
Goods in process 36,048 36,876
Raw materials and supplies 47,182 53,509
Houses held for resale 4,159 3,153
Prepaid expenses 10,334 12,156
Property, plant and equipment, at cost 1,168,043 1,149,707
Less - Accumulated depreciation and depletion ( 506,095) ( 477,359)
Deferred income taxes 69,344 84,409
Investments and other long-term assets 51,948 51,800
Unamortized debt expense 52,023 31,215
Goodwill, net 514,619 527,696
------------- ---------------
$ 3,314,409 $ 3,562,670
------------- ---------------
------------- ---------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Book overdrafts $ 23,224 $ 24,867
Accounts payable 118,419 145,476
Accrued expenses 110,847 126,022
Income taxes payable 50,237 60,098
Short-term notes payable - 5,800
Long-term senior debt:
Mortgage-backed/asset-backed notes 1,715,833 1,886,167
Other senior debt 579,050 589,450
Accrued interest 21,699 27,147
Accumulated postretirement benefits obligation 291,327 283,708
Other long-term liabilities 53,250 54,848
Stockholders' equity
Common stock - 200,000,000 authorized, $.01 par value
Issued - 55,300,851 and 55,283,686 shares 553 553
Capital in excess of par value 1,169,260 1,169,052
Retained earnings (accumulated deficit) ( 755,731) ( 784,503)
Cumulative foreign currency translation adjustment 244 ( 52)
Treasury stock - 4,053,092 and 1,398,092 shares, at cost ( 59,989) ( 21,841)
Excess of additional pension liability over
unrecognized prior years service cost ( 4,122) ( 4,122)
Net unrealized appreciation in marketable securities 308 -
------------- ----------------
Total stockholders' equity 350,523 359,087
------------- ---------------
$ 3,314,409 $ 3,562,670
------------- ---------------
------------- ---------------
</TABLE>
See accompanying Notes to Consolidated Financial Statements
<PAGE>
WALTER INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
For the three months ended
November 30,
------------------------------------------------
1998 1997
------------- ------------
(in thousands, except per share amounts)
<S> <C> <C>
Sales and revenues:
Net sales $ 445,490 $ 381,309
Time charges 60,941 60,264
Miscellaneous 8,523 6,496
------------- ------------
514,954 448,069
------------- ------------
Cost and expenses:
Cost of sales 361,495 304,404
Depreciation and depletion 21,543 20,142
Selling, general and administrative 43,650 40,459
Postretirement benefits 5,844 5,564
Provision for possible losses 10 ( 931)
Interest and amortization of debt expense 46,020 48,048
Amortization of goodwill 10,614 9,770
Loss on sale of subsidiary 3,849 -
------------- ------------
493,025 427,456
------------- ------------
21,929 20,613
Income tax expense:
Current ( 309) ( 779)
Deferred ( 1,885) ( 7,193)
------------- ------------
Income before extraordinary item 19,735 12,641
Extraordinary item - loss on early extinguishment of
debt (net of income tax benefit of $1,434) - ( 2,663)
------------- ------------
Net income $ 19,735 $ 9,978
------------- ------------
------------- ------------
Basic earnings per share:
Income before extraordinary item $ .38 $ .24
Extraordinary item - ( .05)
------------ -------------
Net income $ .38 $ .19
------------- -------------
------------- -------------
Diluted earnings per share:
Income before extraordinary item $ .38 $ .23
Extraordinary item - ( .05)
------------- -------------
Net income $ .38 $ .18
------------- -------------
------------- -------------
See accompanying Notes to Consolidated Financial Statements
</TABLE>
<PAGE>
WALTER INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
For the six months ended
November 30,
------------------------------------------------
1998 1997
------------- -------------
(in thousands except per share amounts)
<S> <C> <C>
Sales and revenues:
Net sales $ 868,090 $ 716,187
Time charges 125,172 118,088
Miscellaneous 14,826 13,127
------------- ------------
1,008,088 847,402
------------- ------------
Cost and expenses:
Cost of sales 710,023 564,887
Depreciation and depletion 41,576 37,710
Selling, general and administrative 86,759 75,569
Postretirement benefits 11,717 11,130
Provision for possible losses 95 ( 612)
Interest and amortization of debt expense 93,505 92,911
Amortization of goodwill 21,223 18,186
Loss on sale of subsidiary 3,849 -
------------- ------------
968,747 799,781
------------- ------------
39,341 47,621
Income tax expense:
Current ( 1,304) ( 1,825)
Deferred ( 9,265) ( 19,090)
------------- -------------
Income before extraordinary item 28,772 26,706
Extraordinary item - Loss on early extinguishment of
debt (net of income tax benefit of $1,434) - ( 2,663)
-------------- -------------
Net income $ 28,772 $ 24,043
-------------- -------------
-------------- -------------
Basic earnings per share:
Income before extraordinary item $ .55 $ .50
Extraordinary item - ( .05)
------------- -------------
Net income $ .55 $ .45
-------------- -------------
-------------- -------------
Diluted earnings per share:
Income before extraordinary item $ .55 $ .49
Extraordinary item - ( .05)
-------------- -------------
Net income $ .55 $ .44
-------------- -------------
-------------- -------------
</TABLE>
See accompanying Notes to Consolidated Financial Statements
<PAGE>
WALTER INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
(UNAUDITED)
<TABLE>
<CAPTION>
Retained Accumulated
Earnings Other
Comprehensive (Accumulated Comprehensive Common Capital in Treasury
Total Income Deficit) Income Stock Excess Stock
----------- ------------- ------------ ------------- ------ ---------- --------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at May 31, 1998 $ 359,087 $ - $(784,503) $(4,174) $553 $1,169,052 $(21,841)
Comprehensive income
Net income 28,772 28,772 28,772
Other comprehensive income, net of tax:
Net unrealized appreciation in
marketable securities 308 308
Foreign currency translation adjustment 296 296
---------
Other comprehensive income 604 604
--------
Comprehensive income $ 29,376
--------
--------
Stock issued from options exercises 208 208
Purchases of treasury stock ( 38,148) (38,148)
---------- --------- ------- ----- ---------- ---------
Balance at November 30, 1998 $ 350,523 $(755,731) $(3,570) $ 553 $1,169,260 $(59,989)
---------- --------- ------- ----- ---------- ---------
---------- --------- ------- ----- ---------- ---------
</TABLE>
See accompanying Notes to Consolidated Financial Statements
<PAGE>
WALTER INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
For the six months ended
November 30,
----------------------------------------------
1998 1997
------------- -------------
(in thousands)
<S> <C> <C>
OPERATING ACTIVITIES
Net income $ 28,772 $ 24,043
Charges to income not affecting cash:
Depreciation and depletion 41,576 37,710
Provision for deferred income taxes 9,265 19,090
Accumulated postretirement benefits obligation 7,619 7,356
Provision for other long-term liabilities ( 1,598) ( 84)
Amortization of goodwill 21,223 18,186
Amortization of debt expense 2,892 3,413
Loss on sale of subsidiary ( 3,849) -
Extraordinary item - Loss on early extinguishment of
debt (net of income tax benefit) - 2,663
------------- -------------
113,598 112,377
Decrease (increase) in assets, net of effects
from acquisitions:
Short-term investments, restricted 118,682 ( 27,597)
Marketable securities 33,165 1,459
Instalment notes receivable, net (a) 18,023 ( 78)
Trade and other notes and accounts receivables, net 11,519 22,769
Inventories 30,341 3,594
Prepaid expenses 1,223 ( 3,288)
Increase (decrease) in liabilities, net of effects
from acquisitions:
Book overdrafts ( 1,643) 1,932
Accounts payable ( 27,042) ( 15,857)
Accrued expenses ( 17,559) ( 15,333)
Income taxes payable ( 3,957) ( 1,898)
Accrued interest ( 5,448) 3,358
------------- -------------
Cash flows from operating activities 270,902 81,438
------------- -------------
INVESTING ACTIVITIES
Additions to property, plant and equipment,
net of retirements ( 38,202) ( 44,278)
(Increase) decrease in investments and other assets, net ( 249) 3,127
Proceeds from sale of subsidiary 14,878 -
Acquisitions, net of cash acquired ( 6,976) ( 395,383)
------------- -------------
Cash flows used in investing activities ( 30,549) ( 436,534)
-------------- -------------
FINANCING ACTIVITIES
Issuance of short-term notes payable and long-term
senior debt 151,771 1,318,221
Retirement of short-term notes payable and
long-term senior debt ( 338,305) ( 919,672)
Additions to unamortized debt expense ( 23,700) ( 18,574)
Purchases of treasury stock ( 38,148) ( 21,799)
Exercise of employee stock options 208 713
Net unrealized appreciation in marketable securities 308 -
-------------- -------------
Cash flows (used in) from financing activities ( 247,866) 358,889
-------------- -------------
EFFECT OF EXCHANGE RATE ON CASH 296 -
-------------- -------------
Net (decrease) increase in cash and cash equivalents ( 7,217) 3,793
Cash and cash equivalents at beginning of period 54,709 35,782
-------------- -------------
Cash and cash equivalents at end of period $ 47,492 $ 39,575
-------------- -------------
-------------- -------------
</TABLE>
(a) Consists of sales and resales, net of repossessions and provision for
possible losses, of $82,335 and $87,215 and cash collections on account and
payouts in advance of maturity of $100,358 and $87,137, respectively.
See accompanying Notes to Consolidated Financial Statements
<PAGE>
WALTER INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOVEMBER 30, 1998
(IN THOUSANDS, EXCEPT PER SHARE DATA)
Note 1 - Principles of Consolidation
Walter Industries, Inc. (the "Company") is a diversified holding company with
five operating segments: Homebuilding and Financing, Water Transmission
Products, Natural Resources, Industrial Products and Energy Services. Through
its operating segments, the Company offers a diversified line of products and
services primarily including home construction and financing, ductile iron
pressure pipe, coal, methane gas, furnace and foundry coke, chemicals, slag
fiber, aluminum foil and sheet products, petroleum coke and distribution and
refinery outsourcing services. The consolidated financial statements include the
accounts of the Company and all of its subsidiaries. Preparation of financial
statements in accordance with generally accepted accounting principles requires
management to make estimates and assumptions that affect the amounts reported in
the consolidated financial statements. Actual results could differ from those
estimates. All significant intercompany balances have been eliminated.
All of the November 30, 1998 and 1997 amounts are unaudited but, in the
opinion of management, all adjustments, consisting only of normal recurring
adjustments necessary for a fair presentation, have been made. The results
for the three and six months ended November 30, 1998 and 1997 are not
necessarily indicative of results for a full fiscal year. These financial
statements should be read in conjunction with the Company's audited
consolidated financial statements and notes thereto in the Company's Annual
Report on Form 10-K for the year ended May 31, 1998. Unless otherwise
specified, accounting principles and capitalized terms used herein are as
defined in the aforementioned Form 10-K.
Note 2 - Acquisitions and Divestitures
On October 1, 1998 the Company sold the assets of the window balance operations
of JW Window Components, Inc. ("JWWC") in an all cash transaction for $9.9
million. On November 23, 1998, the Company sold the outstanding capital stock of
JWWC, which comprised the roll form and screen products operations, in exchange
for $5.0 million in cash. These transactions complete the Company's divestiture
of JWWC. The Company recorded a pretax loss of $3,849 and a tax benefit of
$10,528 on the sale of JWWC.
Effective October 1, 1998, Jim Walter Homes, Inc., the Company's homebuilding
subsidiary, acquired Texas-based builder Dream Homes, Inc. in exchange for
approximately $7.0 million in cash.
On October 15, 1997, the Company completed the acquisition of AIMCOR, which,
through its Carbon Group, is a leading international provider of products and
outsourcing services to the petroleum, steel, foundry and aluminum
industries. Through its Metals Group, AIMCOR is also a leading supplier of
ferrosilicon in the southeastern United States. The purchase price was
approximately $400.0 million, including direct acquisition costs of $4.8
million, and is subject to certain indemnity obligations of the parties as
required by the Stock Purchase Agreement. The acquisition was accounted for
using the purchase method of accounting and had an effective date of
September 30, 1997.
Note 3 - Restricted Short-Term Investments
Restricted short-term investments at November 30, 1998 and May 31, 1998
include (i) temporary investment of reserve funds and collections on
instalment notes receivable owned by Mid-State Trusts II, III, IV, V and VI
(collectively the "Trusts") ($113.8 million and $125.3 million,
respectively), which are available only to pay
<PAGE>
expenses of the Trusts and principal and interest on indebtedness of the Trusts,
(ii) miscellaneous other segregated accounts restricted to specific uses ($15.0
million and $15.3 million, respectively), and (iii) certain funds held by Trust
II that are in excess of the interest on the Trust II Mortgage-Backed Notes, but
which were subject to retention at May 31, 1998 ($106.9 million). In June 1998,
an agreement was reached with Financial Security Assurance, Inc. to release
approximately $121.6 million of funds held by Trust II which were subject to
retention at July 1, 1998. These funds were utilized to pay down Trust IV
indebtedness.
Note 4 - Instalment Notes Receivable and Mortgage Backed/Asset Backed Notes
Mid-State Trusts II, III, IV and VI are business trusts organized by Mid-State
Homes, Inc. ("Mid-State Homes"), which owns all of the beneficial interest in
Trusts III, IV and VI. Trust IV owns all of the beneficial interest in Trust II.
The Trusts were organized for the purpose of purchasing instalment notes
receivable from Mid-State Homes with the net proceeds from the issuance of
mortgage or asset-backed notes. The assets of Trusts II, III, IV and VI,
including the instalment notes receivable, are not available to satisfy claims
of general creditors of the Company and its subsidiaries. The liabilities of
Mid-State Trusts II, III, IV and VI for their publicly issued debt are to be
satisfied solely from the proceeds of the underlying instalment notes and are
non-recourse to the Company and its subsidiaries.
Mid-State Trust V ("Trust V"), a business trust in which Mid-State Homes holds
all the beneficial interest, was organized to hold instalment notes receivable
as collateral for borrowings to provide temporary financing to Mid-State Homes
for its current purchases of instalment notes and mortgages from Jim Walter
Homes.
The gross amount of instalment notes receivable, the economic balance and
long-term debt outstanding by trust are as follows (in thousands):
<TABLE>
<CAPTION>
November 30, 1998
-----------------------------------------------------------------------
Gross Balance Economic Balance Debt Outstanding
---------------- --------------- ----------------
<S> <C> <C> <C>
Trust II $ 694,445 $ 446,715 $ 290,700
Trust III 281,665 157,134 66,090
Loan & Security Agreement - - 80,300
Trust IV 1,315,167 597,754 614,264
Trust V 914,529 356,882 284,000
Trust VI 988,715 399,742 380,479
Unpledged 6,010 2,417 -
---------------- --------------- ---------------
Total $ 4,200,531 $ 1,960,644 $ 1,715,833
---------------- --------------- ---------------
---------------- --------------- ---------------
</TABLE>
At May 31, 1998, the Company had forward-interest rate lock agreements
which fixed the interest rates on a portion of asset-backed long-term debt
anticipated to be issued in October 1998. The lock agreements in effect at
May 31, 1998 were terminated on October 9, 1998. The losses incurred ($24.0
million) have been deferred and will be amortized to interest expense over
the life of the Mid-State Trust VII Asset Backed Notes issued on December 10,
1998. See Note 9 - "Subsequent Event".
Note 5 - Stockholders' Equity
In September 1998, the Company's Board of Directors authorized an increase,
from two to four million, in the number of shares of the Company's common
stock which may be repurchased under the share repurchase program
authorized in July 1998. Information relating to the Company's share
repurchases under this program is set forth below (in thousands):
<TABLE>
<CAPTION>
Shares Amount
------ ------
<S> <C> <C>
Three months ended November 30, 1998 1,840 $24,465
----- -------
----- -------
Six months ended November 30, 1998 2,665 $38,148
----- -------
----- -------
</TABLE>
<PAGE>
Note 6 - Earnings Per Share
A reconciliation of the basic and diluted per share computations for the three
months and six months ended November 30, 1998 and 1997 are as follows (in
thousands, except per share amounts):
<TABLE>
<CAPTION>
Three months ended November 30,
---------------------------------------------------------------
1998 1997
---------------------------- ---------------------------
Basic Diluted Basic Diluted
------------- ------------ ------------ -------------
<S> <C> <C> <C> <C>
Income before extraordinary item $ 19,735 $ 19,735 $ 12,641 $ 12,641
Extraordinary item - - ( 2,663) ( 2,663)
------------- ------------ ------------ -------------
Net income $ 19,735 $ 19,735 $ 9,978 $ 9,978
------------- ------------ ------------ -------------
------------- ------------ ------------ -------------
Shares of common stock outstanding:
Average number of common shares (a) 51,458 51,458 53,685 53,685
Effect of diluted securities:
Stock options (b)(c) - 49 - 872
------------- ------------ ------------ -------------
51,458 51,507 53,685 54,557
------------- ------------ ------------ -------------
------------- ------------ ------------ -------------
Per share:
Income before extraordinary item $ .38 $ .38 $ .24 $ .23
Extraordinary item - - ( .05) ( .05)
------------- ------------ ------------ -------------
Net income $ .38 $ .38 .19 .18
------------- ------------ ------------ -------------
------------- ------------ ------------ -------------
</TABLE>
(a) The three months ended November 30, 1998 and 1997 include 3,880,140
additional shares issued to an escrow account on September 13, 1995
pursuant to the Consensual Plan, but does not include 4,053,092 and
1,398,092 shares, respectively, held in treasury.
(b) Represents the number of shares of common stock issuable on the
exercise of dilutive employee stock options less the number of shares
of common stock which could have been purchased with the proceeds from
the exercise of such options. These purchases of common stock were
assumed to have been made at the higher of either the market price of
the common stock at the end of the period or the average market price
for the period.
(c) For the three months ended November 30, 1998, does not include
2,246,302 shares subject to options because such options would have an
anti-dilutive effect in such period.
<PAGE>
<TABLE>
<CAPTION>
Six months ended November 30,
---------------------------------------------------------------
1998 1997
---------------------------- ---------------------------
Basic Diluted Basic Diluted
------------- ------------ ------------ -------------
<S> <C> <C> <C> <C>
Income before extraordinary item $ 28,772 $ 28,772 $ 26,706 $ 26,706
Extraordinary item - - ( 2,663) ( 2,663)
------------- ------------- ------------- -------------
Net income $ 28,772 $ 28,772 $ 24,043 $ 24,043
------------- ------------- ------------- -------------
------------- ------------- ------------- -------------
Shares of common stock outstanding:
Average number of common shares (a) 52,458 52,458 53,910 53,910
Effect of diluted securities:
Stock options (b)(c) - 227 - 876
------------- ------------- ------------- -------------
52,458 52,685 53,910 54,786
------------- ------------- ------------- -------------
------------- ------------- ------------- -------------
Per share:
Income before extraordinary item $ .55 $ .55 $ .50 $ .49
Extraordinary item - - ( .05) ( .05)
------------- ------------- ------------- -------------
Net income $ .55 $ .55 $ .45 $ .44
------------- ------------- ------------- -------------
------------- ------------- ------------- -------------
</TABLE>
(a) The six months ended November 30, 1998 and 1997 include 3,880,140
additional shares issued to an escrow account on September 13, 1995
pursuant to the Consensual Plan, but does not include 4,053,092 and
1,398,092 shares held in treasury.
(b) Represents the number of shares of common stock issuable on the
exercise of dilutive employee stock options less the number of shares
of common stock which could have been purchased with the proceeds from
the exercise of such options. These purchases of common stock were
assumed to have been made at the higher of either the market price of
the common stock at the end of the period or the average market price
for the period.
(c) For the six months ended November 30, 1998, does not include 954,501
shares subject to options because such options would have an
anti-dilutive effect in such period.
Note 7 - Comprehensive Income
Effective in the first quarter ended August 31, 1998, the Company adopted
Statement of Financial Accounting Standards No. 130 - "Reporting Comprehensive
Income" ("FAS 130"). FAS 130 requires that all items of comprehensive income be
classified separately and the accumulated balance of comprehensive income be
reported in the equity section of the financial statements. The adoption of FAS
130 did not have a material effect on the Company's financial condition.
<PAGE>
Note 8 - Segment Information
Information relating to the Company's operating segments is set forth below (in
thousands):
<TABLE>
<CAPTION>
Three months ended
November 30,
------------------------------------------
1998 1997
---------------- ----------------
<S> <C> <C>
Sales and revenues:
Homebuilding and Financing $ 112,339 $ 113,725
Water Transmission Products 130,121 115,668
Natural Resources 92,026 89,144
Industrial Products 81,494 73,188
Energy Services 98,858 56,395
Corporate 116 ( 51)
---------------- ----------------
Consolidated sales and revenues $ 514,954 $ 448,069
---------------- ----------------
---------------- ----------------
Operating income (a) :
Homebuilding and Financing (b) $ 28,959 $ 23,224
Water Transmission Products 8,558 5,591
Natural Resources 561 7,632
Industrial Products 2,758 4,925
Energy Services 7,152 1,941
---------------- ----------------
Operating income 47,988 43,313
Less: General corporate expense (b) ( 3,925) ( 3,975)
Senior debt interest expense (b) ( 10,610) ( 8,790)
Intercompany interest expense (b) ( 11,524) ( 9,935)
---------------- ----------------
Income before tax expense 21,929 20,613
Income tax expense ( 2,194) ( 7,972)
---------------- ----------------
Income before extraordinary item $ 19,735 $ 12,641
---------------- ----------------
---------------- ----------------
</TABLE>
(a) - Operating income amounts are after deducting amortization of goodwill. A
breakdown of goodwill by segment is as follows (in thousands):
<TABLE>
<CAPTION>
Three months ended
November 30,
------------------------------------------
1998 1997
---------------- ----------------
<S> <C> <C>
Homebuilding and Financing $ 6,647 $ 6,762
Water Transmission Products 3,045 3,046
Natural Resources ( 331) ( 332)
Industrial Products 157 159
Energy Services 2,391 1,429
Corporate ( 1,295) ( 1,294)
---------------- ----------------
$ 10,614 $ 9,770
---------------- ----------------
---------------- ----------------
</TABLE>
<PAGE>
(b) - Interest and amortization of debt expense incurred by the
Homebuilding and Financing segment and Corporate is as follows (in
thousands):
<TABLE>
<CAPTION>
Three months ended
November 30,
------------------------------------------
1998 1997
---------------- ----------------
<S> <C> <C>
Homebuilding and Financing:
Gross interest $ 35,410 $ 39,258
Less: Intercompany interest income ( 11,524) ( 9,935)
---------------- ----------------
Net interest 23,886 29,323
Corporate:
Senior debt interest 10,610 8,790
Intercompany interest 11,524 9,935
---------------- ----------------
$ 46,020 $ 48,048
---------------- ----------------
---------------- ----------------
</TABLE>
The general corporate expense, senior debt interest expense and
intercompany interest expense are attributable to all operating
segments, but cannot be reasonably allocated to specific segments.
<TABLE>
<CAPTION>
Six months ended
November 30,
------------------------------------------
1998 1997
---------------- ----------------
<S> <C> <C>
Sales and revenues:
Homebuilding and Financing $ 224,189 $ 224,563
Water Transmission Products 250,841 224,527
Natural Resources 179,736 190,773
Industrial Products 166,335 150,851
Energy Services 186,831 56,395
Corporate 156 293
---------------- ----------------
Consolidated sales and revenues $ 1,008,088 $ 847,402
---------------- ----------------
---------------- ----------------
Operating income (a) :
Homebuilding and Financing (b) $ 56,893 $ 42,911
Water Transmission Products 15,636 10,939
Natural Resources ( 2,795) 21,175
Industrial Products 8,979 9,680
Energy Services 10,696 1,941
---------------- ----------------
Operating income 89,409 86,646
Less: General corporate expense (b) ( 5,929) ( 5,692)
Senior debt interest expense (b) ( 21,162) ( 14,726)
Intercompany interest expense (b) ( 22,977) ( 18,607)
---------------- ----------------
Income before tax expense 39,341 47,621
Income tax expense ( 10,569) ( 20,915)
---------------- ----------------
Income before extraordinary item $ 28,772 $ 26,706
---------------- ----------------
---------------- ----------------
</TABLE>
<PAGE>
(a) - Operating income amounts are after deducting amortization of goodwill. A
breakdown of goodwill by segment is as follows (in thousands):
<TABLE>
<CAPTION>
Six months ended
November 30,
------------------------------------------
1998 1997
---------------- ----------------
<S> <C> <C>
Homebuilding and Financing $ 13,546 $ 13,578
Water Transmission Products 6,124 6,127
Natural Resources ( 666) ( 667)
Industrial Products 319 320
Energy Services 4,502 1,429
Corporate ( 2,602) ( 2,601)
---------------- ----------------
$ 21,223 $ 18,186
---------------- ----------------
---------------- ----------------
</TABLE>
(b) - Interest and amortization of debt expense incurred by the
Homebuilding and Financing segment and Corporate is as follows (in
thousands):
<TABLE>
<CAPTION>
Six months ended
November 30,
------------------------------------------
1998 1997
---------------- ----------------
<S> <C> <C>
Homebuilding and Financing:
Gross interest $ 72,343 $ 78,185
Less: Intercompany interest income ( 22,977) ( 18,607)
---------------- ----------------
Net interest 49,366 59,578
Corporate:
Senior debt interest 21,162 14,726
Intercompany interest 22,977 18,607
---------------- ----------------
$ 93,505 $ 92,911
---------------- ----------------
---------------- ----------------
</TABLE>
The general corporate expense, senior debt interest expense and
intercompany interest expense are attributable to all operating
segments, but cannot be reasonably allocated to specific segments.
Note 9 - Subsequent Event
On December 10, 1998, Mid-State Homes purchased from Trust V instalment notes
having a gross amount of $858.7 million and an economic balance of $335.3
million. Mid-State Homes subsequently sold these notes to Mid-State Trust VII
(Trust VII), a business trust organized by Mid-State Homes, which owns all of
the beneficial interest in Trust VII. These sales were in exchange for the
net proceeds from the public issuance of $313.5 million of Asset Backed Notes
by Trust VII. The notes were issued in a single class and bear interest at
6.34% payable quarterly beginning March 15, 1999. The notes have a final
maturity of December 15, 2036. The $313.5 million in proceeds were primarily
used to repay related asset-backed borrowings of $284.0 million under the
Mid-State Trust V warehouse facility. Lehman Brothers, Inc., an affiliate of
Lehman Brothers Holdings, Inc., which owned 2.8 million shares of the
Company's common stock at November 30, 1998, served as an underwriter in
connection with the public issuance of the Trust VII Asset Backed Notes and
received underwriting commissions and fees of $1.3 million.
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
The Company completed the acquisition of Applied Industrial Materials
Corporation ("AIMCOR") on October 15, 1997. AIMCOR is a leading international
provider of products and outsourcing services to the petroleum, steel, foundry
and aluminum industries. AIMCOR is also a leading supplier of ferrosilicon in
the southeastern United States (see Note 2 of "Notes to Consolidated Financial
Statements"). Sales and revenues and operating income for AIMCOR are reflected
in the Company's business segment, the Energy Services Group.
RESULTS OF OPERATIONS
THREE MONTHS ENDED NOVEMBER 30, 1998 AND 1997
Net sales and revenues for the three months ended November 30, 1998 were $66.9
million above the prior year period, a 14.9% increase of which 9.5%
was attributable to AIMCOR. In addition to the contribution from AIMCOR, the
increase was the result of improved performances from all other operating
segments except the Homebuilding and Financing Group.
Cost of sales, exclusive of depreciation, of $361.5 million was 81.1% of net
sales in the 1998 period versus $304.4 million and 79.8% in 1997. The percentage
increase reflected lower gross profit margins realized on coal and methane gas.
Selling, general and administrative expenses of $43.7 million were 8.5% of net
sales and revenues in the 1998 period compared to $40.5 million and 9.0% in
1997.
Interest and amortization of debt expense was $46.0 million in the 1998 period
versus $48.0 million in 1997 as a result of lower interest rates offset by
slightly higher average outstanding debt balances primarily resulting from the
AIMCOR acquisition. The average rate of interest in the 1998 period was 7.52% as
compared to 8.20% in 1997. The average prime rate of interest was 8.17% and
8.50% in the 1998 and 1997 periods, respectively.
The Company's effective tax rate in the 1998 and 1997 periods differed from the
statutory tax rate primarily due to amortization of goodwill (excluding such
amounts related to the AIMCOR acquisition), which is not deductible for tax
purposes and percentage depletion. Additionally, in the 1998 period, the
Company's effective tax rate differed from the statutory rate as a result of a
$10.5 million non-recurring tax benefit recognized on the sale of JW Window
Components, Inc. (JWWC), the Company's window components operation.
Net income in the 1998 period was $19.7 million, including an after tax gain
of $6.7 million from the sale of JWWC. This compared to net income of $10.0
million in the 1997 period, which included a $2.7 million extraordinary loss
from the write-off of unamortized debt expense related to the refinancing of
bank credit facilities in conjunction with the Company's October 1997
acquisition of AIMCOR. The increase in earnings adjusted for these
non-recurring items approximates $0.3 million, which reflects all of the
factors mentioned below in the segment analysis. The Company's basic earnings
per share increased 100% to $0.38 compared to last year's earnings per share
of $0.19.
Segment Analysis:
Homebuilding and Financing Group sales and revenues were $112.3 million, or
1.2%, below the prior year period. This performance reflects a 7.3% increase
in the average net selling price, from $48,100 in the 1997 period to $51,600
in 1998, which was more than offset by a decrease in the number of units
sold, from 978 units in the 1997 period to 888 units in 1998. The higher
average selling price is primarily attributable to price increases instituted
to compensate for higher building material and labor costs, coupled with
consumer preference for new and more upscale models and amenities being
offered by Jim Walter Homes. The decrease in unit sales resulted from
continuing intense competition from local and regional homebuilders as well
as labor shortages due
<PAGE>
to high demand for subcontractors and construction crews. Time charge income
(revenues received from Mid-State Homes' instalment note portfolio) increased
from $60.3 million in the 1997 period to $60.9 million in 1998. The increase
is attributable to increased payoffs received in advance of maturity and to
an increase in the average balance per account in the portfolio, partially
offset by a reduction in the total number of accounts. The aggregate amount
of instalment notes receivable having at least one payment 90 or more days
delinquent was 3.46% of the total instalment notes receivable in the 1998
period compared to 2.94% in the prior year period. The allowance for possible
losses as a percentage of net instalment notes receivable was approximately
2.0% for both periods, which reflects management's assessment of the amount
necessary to provide against future loss in the portfolio. Jim Walter Homes'
backlog at November 30, 1998 was 2,404 units compared to 2,041 units at
November 30, 1997. Operating income of $29.0 million (net of interest
expense) was $5.7 million greater than the prior year period, reflecting the
increase in the average net selling price per home sold, higher time charge
income, an improved homebuilding gross profit margin and lower interest
expense in the 1998 period ($23.9 million) as compared to the prior year
period ($29.3 million), partially offset by the decrease in the number of
homes sold.
Water Transmission Products Group sales and revenues were $130.1 million, or
12.5%, above the prior year period. The increase was the result of greater
sales volumes for ductile iron pressure pipe, fittings, valves and hydrants,
partially offset by lower selling prices for all of these products. Ductile
iron pressure pipe shipments of 167,000 tons were 10% greater than in the
prior year period. The order backlog at November 30, 1998 was 116,614 tons,
which represents approximately three months shipments, compared with 117,510
tons at November 30, 1997. Operating income of $8.6 million was $3.0 million
above the prior year period. This performance was the result of the
previously mentioned increase in sales and revenues and higher gross profit
margins realized due to lower raw material costs (primarily scrap iron) and
improved operating efficiencies.
Natural Resources Group sales and revenues were $92.0 million, or 3.2%, above
the prior year period due to increased coal and methane gas shipments,
partially offset by lower selling prices. A total of 1.97 million tons of
coal was sold at an average selling price per ton of $41.83 in the current
year period compared with 1.81 million tons at $43.50 in 1997. The decrease
in the average selling price was the result of lower price realizations on
shipments to Alabama Power and the worldwide metallurgical market. Methane
gas sales volumes were 2.4 billion cubic feet in the 1998 period versus 2.2
billion cubic feet in 1997. The average selling price of methane gas per
thousand cubic feet was $2.90 in the 1998 period versus $4.27 in 1997. Both
periods include a monthly reservation fee of $.7 million. The Group's
operating income of $0.6 million was below the prior year period by $7.0
million. This performance was the result of higher production costs ($38.56
per ton in the 1998 period versus $37.13 in 1997) attributable to continued
geological problems at two of the Groups four mines, coupled with lower
selling prices for coal and methane gas, and partially offset by higher
methane gas and coal sales volumes.
Industrial Products Group sales and revenues were $81.5 million, or 11.3%,
greater than the prior year period. The improved performance was the result
of increased shipments of aluminum foil and sheet products, foundry coke and
metal building and foundry products, coupled with higher selling prices for
furnace and foundry coke, and partially offset by lower sales volumes for
furnace coke and slag fiber and lower selling prices for aluminum foil and
sheet products. Operating income of $2.8 million was below the prior year
period by $2.2 million. This performance resulted from the pre-tax loss on
the sale of JWWC, partially offset by the sales increases and higher gross
profit margins realized on aluminum foil and sheet products and foundry coke.
SIX MONTHS ENDED NOVEMBER 30, 1998 AND 1997
Net sales and revenues for the six months ended November 30, 1998 were $160.7
million above the prior year period, representing a 19.0% increase of which
15.4% was attributable to AIMCOR. In addition to the contribution from
AIMCOR, the increase was the result of improved performances from Water
Transmission Products and Industrial Products.
Cost of sales, exclusive of depreciation, of $710.0 million was 81.8% of net
sales in the 1998 period versus $564.9 million and 78.9% in 1997. The percentage
increase reflected lower gross profit margins realized on coal
<PAGE>
and methane gas.
Selling, general and administrative expenses of $86.8 million were 8.6% of net
sales and revenues in the 1998 period versus $75.6 million and 8.9% in 1997.
Interest and amortization of debt expense was $93.5 million in the 1998 period
versus $92.9 million in 1997 reflecting higher average outstanding debt balances
primarily resulting from the AIMCOR acquisition, partially offset by lower
interest rates. The average rate of interest in the 1998 period was 7.53% as
compared to 8.17% in 1997. The average prime rate of interest was 8.33% and
8.50% in the 1998 and 1997 periods, respectively.
The Company's effective tax rate in the 1997 period differed from the statutory
tax rate primarily due to amortization of goodwill (excluding such amounts
related to the AIMCOR acquisition), which is not deductible for tax purposes and
percentage depletion. Additionally, in the 1998 period, the Company's effective
tax rate differed from the statutory rate as a result of a $10.5 million
non-recurring tax benefit recognized on the sale of JWWC.
Net income in the 1998 period was $28.8 million including an after-tax gain of
$6.7 million from the sale of JWWC. This compared to net income of $24.0 million
in the 1997 period, which included a $2.7 million extraordinary loss from the
write-off of unamortized debt expense related to the refinancing of bank credit
facilities in conjunction with the Company's October 1997 acquisition of AIMCOR.
The decrease in earnings adjusted for these non-recurring items approximates
$4.6 million which reflects all of the factors mentioned below in the segment
analysis. The Company's basic earnings per share increased 22% to $0.55 compared
to $0.45 for the six months ended November 30, 1997.
Segment Analysis:
Homebuilding and Financing Group sales and revenues were $224.2 million, or
.2%, below the prior year period. This performance reflects a 6.3% increase
in the average net selling price, from $47,900 in the 1997 period to $50,900
in 1998, which was more than offset by a decrease in the number of units
sold, from 1,957 units in the 1997 period to 1,732 units in 1998. The higher
average selling price is primarily attributable to price increases instituted
to compensate for higher building material and labor costs, coupled with
consumer preference for new and more upscale models and amenities being
offered by Jim Walter Homes. The decrease in unit sales resulted from
continuing intense competition from local and regional homebuilders as well
as labor shortages due to high demand for subcontractors and construction
crews. Time charge income (revenues received from Mid-State Homes' instalment
note portfolio) increased from $118.1 million in the 1997 period to $125.2
million in 1998. The increase is attributable to increased payoffs received
in advance of maturity and to an increase in the average balance per account
in the portfolio, partially offset by a reduction in the total number of
accounts. Operating income of $56.9 million (net of interest expense) was
$14.0 million greater than the prior year period, reflecting higher time
charge income, the increase in the average net selling price per home sold,
an improved homebuilding gross profit margin and lower interest expense in
the 1998 period ($49.4 million) compared to the prior year period ($59.6
million), partially offset by the decrease in the number of homes sold.
Water Transmission Products Group sales and revenues were $250.8 million, or
11.7%, above the prior year period. The increase was the result of greater sales
volumes for ductile iron pressure pipe, fittings, valves and hydrants, partially
offset by lower selling prices for all of these products. Ductile iron pressure
pipe shipments of 326,000 tons were 10% greater than the prior year period.
Operating income of $15.6 million was $4.7 million above the prior year period.
This performance was the result of the previously mentioned increase in sales
and revenues and improved gross profit margins realized due to lower raw
material costs (primarily scrap iron) and improved operating efficiencies.
Natural Resources Group sales and revenues were $179.7 million, or 5.8%, below
the prior year period. The decrease was the result of reduced coal shipments due
to unexpected geological problems in two of the Group's four coal mines, a
five-week work stoppage in one mine early in the first quarter and curtailed
production
<PAGE>
resulting from scheduled mining equipment moves. A total of 3.80 million tons of
coal were sold at an average selling price per ton of $42.42 in the current year
period compared with 4.04 million tons at $42.81 in 1997. The decrease in the
average selling price was the result of lower price realizations on shipments to
Alabama Power and the worldwide metallurgical market. Methane gas sales volumes
were 4.6 billion cubic feet in the 1998 period versus 4.1 billion cubic feet in
1997. The average selling price per thousand cubic feet was $3.03 in the 1998
period versus $3.89 in 1997. Both periods include a monthly reservation fee of
$.7 million. The Group's operating loss of $2.8 million was below the prior year
period by $24.0 million. This performance was the result of lower shipments and
selling prices for coal and methane gas, coupled with higher production costs
($40.96 per ton in the 1998 period versus $36.31 in 1997) attributable to the
previously mentioned geological problems at two of the Company's four mines.
Prior year results included a $4.0 million credit from settlement of an
insurance claim relating to a production hoist accident at Blue Creek Mine No. 3
in fiscal 1993.
Industrial Products Group sales and revenues were $166.3 million, or 10.3%,
greater than the prior year period. The improved performance was the result
of increased shipments of aluminum foil and sheet products, furnace coke, and
metal building and foundry products, coupled with improved selling prices for
furnace and foundry coke and slag fiber, partially offset by lower selling
prices for aluminum foil and sheet products. Operating income of $9.0 million
was below the prior year period by $.7 million. This performance resulted
from the pre-tax loss on the sale of JWWC, partially offset by sales
increases and higher gross profit margins realized on aluminum foil and sheet
products, foundry coke and metal building and foundry products.
FINANCIAL CONDITION
Since May 31, 1998, total debt decreased $186.5 million. Scheduled payments
on the mortgage-backed/asset-backed notes amounted to $114.7 million. In
addition, $121.6 million of funds held by Trust II, which were subject to
retention at July 1, 1998, were utilized to pay down Trust IV indebtedness,
pursuant to an agreement reached with Financial Security Assurance, Inc.
Scheduled retirements of other long-term debt amounted to $25.4 million.
Also, during the current six month period, net borrowings under the Mid-State
Trust V Variable Funding Loan Agreement and the Credit Facilities totaled
$66.0 million and $9.2 million, respectively.
Borrowings under the Credit Facilities totaled $575.0 million at November 30,
1998. The Revolving Credit Facility includes a sub-facility for trade and
other standby letters of credit in an amount up to $75.0 million at any time
outstanding. There were $25.2 million face amount of letters of credit
outstanding thereunder as of November 30, 1998.
The Credit Facilities contain a number of significant covenants that, among
other things, restrict the ability of the Company and its subsidiaries to
dispose of assets, incur additional indebtedness, pay dividends, create liens on
assets, enter into capital leases, make investments or acquisitions, engage in
mergers or consolidations, or engage in certain transactions with subsidiaries
and affiliates and otherwise restrict corporate activities (including change of
control and asset sale transactions). In addition, under the Credit Facilities,
the Company is required to maintain specified financial ratios and comply with
certain financial tests, including fixed charge coverage ratios and maximum
leverage ratios. The borrowers are required to maintain a leverage ratio (the
ratio of indebtedness to consolidated EBITDA (as defined in the Credit
Facilities)) of not more than 3.75-to-1 for the measurement period commencing
May 31, 1998 and ending May 30, 1999 and 3.25-to-1 thereafter. The borrowers'
fixed charge coverage ratio (the ratio of (a) EBITDA minus capital expenditures
to (b) the sum of all required principal payments on outstanding indebtedness,
interest expense and dividends paid) is required to be at least 1-to-1 at the
end of each Four Quarter Period (as defined in the Credit Facilities) ended
November 30, 1998 and February 28, 1999 and at least 1.25-to-1 at the end of
each four quarter period for the duration of the Credit Facilities. The Company
was in compliance with these covenants at November 30, 1998.
The Trust V Variable Funding Loan Agreement's covenants, among other things,
restrict the ability of Trust V to dispose of assets, create liens and engage in
mergers or consolidations. The Company was in compliance with these covenants at
November 30, 1998.
<PAGE>
The Loan and Security Agreement contains a number of covenants that, among other
things, restrict the ability of Mid-State Homes to dispose of assets, create
liens on assets, engage in mergers, incur any unsecured or recourse debt, or
make changes to their credit and collection policy. In addition, Mid-State Homes
is required to maintain specified net income and net worth levels. The Company
was in compliance with these covenants at November 30, 1998.
LIQUIDITY AND CAPITAL RESOURCES
Cash and cash equivalents, net of book overdrafts, were approximately $24.3
million at November 30, 1998. Operating cash flows for the six months ended
November 30, 1998, together with issuance of long-term debt under the
Mid-State Trust V Variable Funding Loan Agreement, borrowings under the
Credit Facilities and the use of available cash balances, were primarily used
for retirement of long-term senior debt, interest payments, capital
expenditures and the purchases of approximately 2.7 million shares of common
stock during the six months ended November 30, 1998. In September 1998, the
Company's Board of Directors authorized an increase, from two to four
million, in the number of shares of the Company's common stock which may be
repurchased under its stock repurchase program.
Working capital is required to fund adequate levels of inventories and
accounts receivable. Commitments for capital expenditures at November 30,
1998 were not significant; however, it is estimated that gross capital
expenditures of the Company and its subsidiaries for the remaining six months
of the fiscal year ending May 31, 1999 will approximate $60.0 million.
Because the Company's operating cash flow is significantly influenced by the
general economy and, in particular, levels of domestic construction activity,
current results should not necessarily be used to predict the Company's
liquidity, capital expenditures, investment in instalment notes receivable or
results of operations. The Company believes that the Mid-State Trust V
Variable Funding Loan Agreement will provide Mid-State Homes with the funds
needed to purchase the instalment notes and mortgages generated by Jim Walter
Homes. It is anticipated that one or more permanent financings similar to the
previous Mid-State Homes asset-backed financings will be required over the
next several years to repay borrowings under the Mid-State Trust V Variable
Funding Loan Agreement. The Company believes that under present operating
conditions, sufficient cash flow will be generated to make all required
interest and principal payments on its indebtedness, to make all planned
capital expenditures and meet substantially all operating needs. It is
further expected that amounts under the Revolving Credit Facility will be
sufficient to meet peak operating needs of the Company and to repurchase up
to an additional 1.3 million shares of the Company's common stock, the amount
remaining at November 30, 1998 under the current authorization.
YEAR 2000
Introduction
The Company is currently working to resolve the potential impact of the Year
2000 ("Y2K") on the processing of date-sensitive information by the Company's
computerized information systems. The Y2K problem is the result of computer
programs being written using two digits (rather than four) to define the
applicable year. Any of the Company's programs that have time-sensitive
software may recognize a date using "00" as the year 1900 rather than the
year 2000, which could result in miscalculations or system failures. The
problems created by using abbreviated dates appear in hardware (such as
microchips), operating systems and other software programs. The Company's
Y2K compliance project is intended to determine the readiness of the
Company's business for the year 2000. The Company defines Y2K "compliance"
to mean that the computer code will process all defined future dates properly
and give accurate results.
Description of Areas of Impact and Risk
The Company has identified three areas where the Y2K problem creates risk to the
Company. These areas are : a) internal Information Technology ("IT") systems;
b) non-IT systems with embedded chip technology; and c) system capabilities of
third party businesses with relationships with the Company, including product
suppliers, customers, service providers (such as telephone, power, logistics,
financial services) and other businesses whose failure to be Y2K compliant could
have a material adverse effect on the Company's business, financial condition or
results of operations.
<PAGE>
Plan to Address Year 2000 Compliance
The Company has established a Corporate Steering Committee (the "Committee")
to coordinate solutions to Y2K issues for its information systems. The
Committee includes a representative from each subsidiary as well as a
member of the Company's Law Department, the Director of Information
Technology and the Chief Financial Officer. Each subsidiary also has a
steering committee consisting of the representative on the Committee and
other members from all functional areas of the respective subsidiary. The
Committee has identified systems and applications that require modification
and has evaluated alternative solutions. The Committee also developed a Y2K
Standard that was issued to all subsidiaries and must be followed for Y2K
compliance. Status conference calls are held monthly and on-site progress
reviews are held quarterly. The Company has two data centers which have
installed Y2K compliant mainframe equipment, operating systems and
system software. Separate virtual machines within a computer have been
installed for the purpose of testing. In early calendar 1999, a detailed
internal review will be conducted with each subsidiary to ascertain progress
on supporting documentation, vendor compliance testing which includes
responses from vendors to a questionnaire developed by the Committee
regarding Y2K status, software conversion and testing and progress to
contingency plans.
State of Readiness
IT Systems - The initial inventory and prioritization process for the Company's
IT systems has been completed. The Company's current focus in this area is on
remediation and testing. Approximately 30% of all identified IT system business
components have been deemed compliant as of December 31, 1998. Coding changes
for all legacy systems have been completed and the testing phase is in process.
The Y2K test environment is fully functional. Compliance testing will continue
through 1999 and will be completed in a phase approach beginning with the
financial systems in June 1999. Personal computer and other hardware upgrades
are 85% complete with the remainder on order.
Non-IT systems - Non-IT systems consist of any device which is able to store
and report date-related information, such as access control systems,
elevators, conveyors, and other items containing a microprocessor or internal
clock. The plan utilized by the Company for analysis of the IT systems is
also being used for non-IT systems. The Company currently plans to complete
the Y2K compliance program for all material non-IT systems by November 1999.
Material Third Parties - The Company has created an inventory of what it
believes to be all material third parties with whom the Company has a
business relationship in the United States Y2K readiness surveys were sent to
these third parties beginning in January 1998. The Company is currently
reviewing the responses to these surveys to determine the Y2K readiness of
these third parties. For those critical third party suppliers, service
providers and customers that fail to respond to the Company's survey, the
Company intends to pursue alternative means of obtaining Y2K readiness
information, such as review of publicly available information published by
such third parties. The Company also plans to implement this same approach
to third party Y2K readiness at the Company's foreign subsidiaries. The
Company plans to continue to review its third party relationships throughout
the Y2K compliance program to ensure all material third party relationships
are addressed.
Contingency Planning and Risks
Contingency plan guidelines have been developed by the Committee and provided
to each subsidiary. Contingency plans are currently being prepared at all
subsidiaries. On-site reviews of written contingency plans will be conducted
throughout calendar 1999. While the Company believes that its approach to
Y2K readiness is sound, it is possible that some business components may not
be identified in the inventory, or that the scanning or testing process may not
result in analysis and remediation of all source code. The Company will
assume a third party is not Y2K ready if no Y2K verification is obtained.
The Company's contingency plan will address alternative providers and
processes to deal with business interruptions that may be caused by the
internal system or by the failure of third party providers to be Y2K ready to
the extent possible.
The failure to correct a material Y2K problem could result in an interruption
in, or a failure of, certain normal business activities or operations. Such
failure could materially and adversely affect the Company's results of
operations, liquidity and financial condition.
<PAGE>
Cost of Project
The overall cost of the Company's Y2K compliance effort is estimated to be
approximately $12.2 million based on information currently available.
EURO CONVERSION
On January 1, 1999, eleven of the fifteen member countries of the European
Union commenced conversion from their existing sovereign currencies to a new,
single currency called the euro. Fixed conversion rates between the existing
currencies, the legacy currencies, and the euro will be established and the
euro will become the common legal currency of the participating countries on
this date. The euro will then trade on currency exchanges and will be
available for non-cash transactions. The participants will issue sovereign
debt exclusively in euro and will redenominate outstanding sovereign debt at
this time. Following this introduction period, the participating members
legacy currencies will remain legal tender as denominations of euro until
January 1, 2002. At that time, countries will issue new euro-denominated
bills for use in cash transactions. All legacy currency will be withdrawn
prior to July 1, 2002, completing the euro conversion on this date. As of
January 1, 1999, the participating countries no longer will control their
own monetary policies by directing independent interest rates for the legacy
currencies; instead, the authority to direct monetary policy, including money
supply and official interest rates for the euro, will be exercised by the new
European Central Bank.
The Company has established a plan to address the issues raised by the euro
conversion. These issues include, but are not limited to: the competitive
impact created by cross-border price transparency; the need for the company
and its business partners to adapt IT and non-IT systems to accommodate
euro-denominated transactions; and the need to analyze the legal and
contractual implications of the Company's contracts. The Company currently
anticipates that the required modifications to its systems, equipment and
processes will be made on a timely basis and does not expect that the costs
of such modifications will have a material effect on the Company's financial
position or results of operations.
NEW ACCOUNTING PRONOUNCEMENTS
In February 1998, Statement of Financial Accounting Standards No. 132 -
"Employers' Disclosures about Pensions and Other Postretirement Benefits" ("FAS
132") was issued. FAS 132 becomes effective for fiscal years beginning after
December 15, 1997 (fiscal 1999 for the Company). This statement revises
employers' disclosures about pension and other postretirement benefit plans.
<PAGE>
The Company believes that the adoption of the above standard will not materially
affect its financial performance or reporting.
PRIVATE SECURITIES LITIGATION REFORM ACT SAFE HARBOR STATEMENT
This Form 10-Q contains certain forward-looking statements (as such term is
defined in the Private Securities Litigation Reform Act of 1995) and information
relating to the Company that is based on the beliefs of the management of the
Company, as well as assumptions made by and information currently available to
the management of the Company. When used in this Form 10-Q, the words
"estimate," "project," "believe," "anticipate," "intend," "expect," and similar
expressions are intended to identify forward-looking statements. Such statements
reflect the current views of the Company with respect to future events and are
subject to risks and uncertainties that could cause actual results to differ
materially from those contemplated in such forward-looking statements. Among
those factors which could cause actual results to differ materially are market
demand, competition, interest rate fluctuations, weather and other risk factors
listed from time to time in the Company's filings with the Securities and
Exchange Commission. Readers are cautioned not to place undue reliance on these
forward-looking statements, which speak only as of the date hereof. The Company
does not undertake any obligation to publicly release any revisions to these
forward looking statements to reflect events or circumstances after the date
hereof or to reflect the occurrence of unanticipated events.
<PAGE>
PART II - OTHER INFORMATION
Item 1. LEGAL PROCEEDINGS
A substantial controversy exists with regard to federal income taxes
allegedly owed by the Company. See "Note 7 - Income Taxes" of Notes to
Consolidated Financial Statements contained in the Company's Annual
Report on Form 10-K for the year ended May 31, 1998.
The Company and its subsidiaries are parties to a number of other
lawsuits arising in the ordinary course of their businesses. Most of
these cases are in a preliminary stage and the Company is unable to
predict a range of possible loss, if any. The Company provides for
costs relating to these matters when a loss is probable and the amount
is reasonably estimable. The effect of the outcome of these matters on
the Company's future results of operations cannot be predicted because
any such effect depends on future results of operations and the amount
and timing of the resolution of such matters. While the results of
litigation cannot be predicted with certainty, the Company believes
that the final outcome of such other litigation will not have a
materially adverse effect on the Company's consolidated financial
condition.
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
At the Company's Annual Meeting of Stockholders held October 8, 1998,
the following proposals were approved:
<TABLE>
<CAPTION>
Affirmative Negative Votes
Votes Votes Withheld
----- ----- --------
<S> <C> <C> <C>
(1) Proposal to elect nine members to the
Board of Directors to serve for the
ensuing year 50,180,039 292,870 -
(2) Proposal to approve the amendment and
restatement of the Company's Restated
Certificate of Incorporation 40,003,656 31,984 10,437,269
(3) Proposal to ratify the appointment of PricewaterhouseCoopers
LLP as independent certified public accountants
for the fiscal year ending May 31, 1999 50,456,642 6,111 10,156
</TABLE>
Item 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibit 3(i) - Amended and Restated Certificate of
Incorporation of Walter Industries, Inc.
(b) Exhibit 27 - Financial Data Schedule
(c) Exhibit 99 - Amendment Agreement No. 4 to Credit Agreement
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
WALTER INDUSTRIES, INC.
/s/ D. M. Fjelstul /s/ F. A. Hult
- -------------------------------- -----------------------------------
D. M. Fjelstul F. A. Hult
Senior Vice President and Vice President, Controller and
Principal Financial Officer Principal Accounting Officer
Date: January 14, 1999
<PAGE>
Exhibit 3(i)
AMENDED AND RESTATED CERTIFICATE OF INCORPORATION
OF
WALTER INDUSTRIES, INC.
WALTER INDUSTRIES, INC., a Delaware Corporation (the "Corporation"), hereby
certifies as follows:
Pursuant to the provisions of Sections 242 and 245 of the General
Corporation Law of the State of Delaware, the stockholders of the Corporation
have duly adopted the following Amended and Restated Certificate of
Incorporation. The Corporation was originally incorporated under the name
"Hillsborough Holdings Corporation" and filed its original Certificate of
Incorporation with the Secretary of State of Delaware on August 6, 1987. The
Corporation filed a Restated Certificate of Incorporation with the Secretary of
State of Delaware on March 17, 1995.
1. The name of the Corporation is WALTER INDUSTRIES, INC.
2. The registered office and registered agent of the Corporation is The
Corporation Trust Company, 1209 Orange Street, Wilmington, New Castle County,
Delaware 19801.
3. The purpose of the Corporation is to engage in any lawful act or activity
for which corporations may be organized under the General Corporation Law of
Delaware.
4. The total number of shares of stock that the Corporation is authorized to
issue is Two Hundred Million (200,000,000) shares of Common Stock, par value
$.01 each.
Voting and transfer of the shares of Common Stock held by The Celotex
Corporation (in its capacity as the Celotex Settlement Fund Recipient under the
Second Amended and Restated Veil Piercing Settlement Agreement ("Celotex")) and
its successors are restricted by Section 3.22(c) of the Amended Joint Plan of
Reorganization dated as of December 9, 1994, as modified
<PAGE>
on March 1, 1995, as the same may be further amended or supplemented from time
to time (the "Consensual Plan"), and the Stockholder's Agreement, dated as of
March 17, 1995, by and between Celotex and the Corporation.
5. The bylaws of the Corporation may be altered, amended or repealed by the
Board of Directors of the Corporation acting by the vote of the majority of the
whole Board of Directors.
6. Except as otherwise provided by the Delaware General Corporation Law as
the same exists or may hereafter be amended, no director of the Corporation
shall be personally liable to the Corporation or its stockholders for monetary
damages for breach of fiduciary duty as a director. Any repeal or modification
of this Article 6 by the stockholders of the Corporation shall not adversely
affect any right or protection of a director of the Corporation in respect of
any act or omission occurring prior to the time of such repeal or modification.
7. To the fullest extent permitted by applicable law, the Corporation shall
indemnify any current or former director, officer, employee or agent of the
Corporation, and such director's, officer's, employee's or agent's heirs,
executors and administrators, against all expenses, judgments, fines and amounts
paid in settlement actually and reasonably incurred by such indemnified party in
connection with any threatened, pending or completed action, suit or proceeding
brought by or in the right of the Corporation, or otherwise, to which such
indemnified party was or is a party or is threatened to be made a party by
reason of such indemnified party's current or former position with the
Corporation or by reason of the fact that such indemnified party is or was
serving, at the request of the Corporation, as a director, officer, partner,
trustee, employee or agent of another corporation, partnership, joint venture,
trust or other enterprise. The Corporation shall, from time to time, reimburse
or advance to any current
2
<PAGE>
or former director or officer or other person entitled to indemnification
hereunder the funds necessary for payment of defense expenses as incurred. Any
repeal or modification of this Article 7 by the stockholders of the Corporation
shall not adversely affect any right or protection of a director of the
Corporation in respect of any act or omission occurring prior to the time of
such repeal or modification.
8. The Tax Oversight Committee shall consist of such members as provided in
Section 1.229 of the Consensual Plan.
* * * *
IN WITNESS WHEREOF, WALTER INDUSTRIES, INC. has caused this Amended and
Restated Certificate of Incorporation to be signed by E. A. Porter, its Vice
President, this 14th day of October, 1998.
WALTER INDUSTRIES, INC.
By: /s/ E. A. Porter
-------------------------
E. A. Porter
Vice President
3
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from the
Consolidated Financial Statements and related notes thereto and is qualified in
its entirety by reference to such financial statements and related notes.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> MAY-31-1999
<PERIOD-START> JUN-01-1998
<PERIOD-END> NOV-30-1998
<CASH> 47,492
<SECURITIES> 134,680
<RECEIVABLES> 1,545,481
<ALLOWANCES> (33,963)
<INVENTORY> 260,503
<CURRENT-ASSETS> 0<F1>
<PP&E> 1,168,043
<DEPRECIATION> (506,095)
<TOTAL-ASSETS> 3,314,409
<CURRENT-LIABILITIES> 0<F1>
<BONDS> 2,294,883
0<F1>
0<F1>
<COMMON> 553
<OTHER-SE> 349,970
<TOTAL-LIABILITY-AND-EQUITY> 3,314,409
<SALES> 868,090
<TOTAL-REVENUES> 1,008,088
<CGS> 710,023
<TOTAL-COSTS> 128,335
<OTHER-EXPENSES> 36,789
<LOSS-PROVISION> 95
<INTEREST-EXPENSE> 93,505
<INCOME-PRETAX> 39,341
<INCOME-TAX> (10,569)
<INCOME-CONTINUING> 28,772
<DISCONTINUED> 0<F1>
<EXTRAORDINARY> 0
<CHANGES> 0<F1>
<NET-INCOME> 28,772
<EPS-PRIMARY> .55
<EPS-DILUTED> .55<F1>
<FN>
<F1>This line item is not presented on the Consolidated Financial Statements.
</FN>
</TABLE>
<PAGE>
Exhibit 99
AMENDMENT AGREEMENT NO. 4
TO CREDIT AGREEMENT
THIS AMENDMENT AGREEMENT is made and entered into as of this 30th day
of November, 1998, by and among WALTER INDUSTRIES, INC., a Delaware corporation
(herein called the "Borrower"), NATIONSBANK NATIONAL ASSOCIATION (the "Agent"),
as Agent for the lenders (the "Lenders") party to the Credit Agreement dated
October 15, 1997, as amended by Amendment Agreement No. 1 dated November 20,
1997, Amendment No. 2 dated January 28, 1998 and Amendment No. 3 dated July 9,
1998 among such Lenders, Borrower and the Agent (the "Agreement").
W I T N E S S E T H:
WHEREAS, the Borrower, the Agent and the Lenders have entered into the
Agreement pursuant to which the Lenders have agreed to make term loans and
revolving loans to the Borrower in the aggregate principal amount of up to
$800,000,000 as evidenced by the Notes (as defined in the Agreement) and to
issue Letters of Credit for the benefit of the Borrower; and
WHEREAS, as a condition to the making of the loans pursuant to the
Agreement the Lenders have required that all Restricted Subsidiaries (other than
inactive Subsidiaries) of the Borrower guarantee payment of all Obligations of
the Borrower arising under the Agreement; and
WHEREAS, the Borrower has requested that the Agreement be amended and
the Agent and the Lenders, subject to the terms and conditions hereof, are
willing to make such amendment, as provided herein;
NOW, THEREFORE, the Borrower, the Agent and the Lenders do hereby agree
as follows:
1. DEFINITIONS. The term "Agreement" as used herein and in the Loan
Documents (as defined in the Agreement) shall mean the Agreement as hereinafter
amended and modified. Unless the context otherwise requires, all terms used
herein without definition shall have the definition provided therefor in the
Agreement.
2. AMENDMENT. SECTION 10.1(A) of the agreement is amended, effective as
of the date hereof, in its entirety, so that as amended it shall read as
follows:
"(a) FIXED CHARGE COVERAGE. Cause, suffer or permit the
Consolidated Fixed Charge Coverage Ratio as at November 30, 1998 and
February 28, 1999 to be less than 1.00 to 1.00 and as at the end of
each Four-Quarter Period thereafter to be less than 1.25 to 1.00."
<PAGE>
3. SUBSIDIARY CONSENTS. Each Restricted Subsidiary of the Borrower that
has delivered a Guaranty to the Agent has joined in the execution of this
Amendment Agreement for the purpose of (i) agreeing to the amendment to the
Agreement and (ii) confirming its guarantee of payment of all the Obligations.
4. CONDITIONS. This Amendment Agreement shall become effective upon the
Borrower delivering to the Agent five (5) counterparts of this Amendment
Agreement duly executed by the Borrower and consented to by each of the
Restricted Subsidiaries.
5. ENTIRE AGREEMENT. This Amendment Agreement sets forth the entire
understanding and agreement of the parties hereto in relation to the subject
matter hereof and supersedes any prior negotiations and agreements among the
parties relative to such subject matter. No promise, conditions, representation
or warranty, express or implied, not herein set forth shall bind any party
hereto, and no one of them has relied on any such promise, condition,
representation or warranty. Each of the parties hereto acknowledges that, except
as in this Amendment Agreement otherwise expressly stated, no representations,
warranties or commitments, express or implied, have been made by any other party
to the other. None of the terms or conditions of this Amendment Agreement may be
changed, modified, waived or canceled orally or otherwise, except by writing,
signed by all the parties hereto, specifying such change, modification, waiver
or cancellation of such terms or conditions, or of any proceeding or succeeding
breach thereof.
6. FULL FORCE AND EFFECT OF AGREEMENT. Except as hereby specifically
amended, modified or supplemented, the Agreement and all of the other Loan
Documents are hereby confirmed and ratified in all respects and shall remain in
full force and effect according to their respective terms.
[Remainder of page intentionally left blank.]
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this Amendment
Agreement to be duly executed by their duly authorized officers, all as of the
day and year first above written.
BORROWER:
WALTER INDUSTRIES, INC.
WITNESS:
/S/ MARY C. SNOW By: /S/ JOSEPH J. TROY
- ---------------------------------- ---------------------
Name: Joseph J. Troy
/S/ MARY E. THORN Title: Vice President & Treasurer
- ----------------------------------
3
<PAGE>
GUARANTORS:
AIMCOR ENTERPRISES INTERNATIONAL
INCORPORATED
AIMCOR (FAR EAST), INC.
APPLIED INDUSTRIAL MATERIALS
CORPORATION
BEST INSURORS, INC.
BEST INSURORS OF MISSISSIPPI, INC.
COAST TO COAST ADVERTISING, INC.
COMPUTER HOLDINGS CORPORATION
DIXIE BUILDING SUPPLIES, INC.
HAMER HOLDINGS CORPORATION
HAMER PROPERTIES, INC.
HOMES HOLDING CORPORATION
JEFFERSON WARRIOR RAILROAD
COMPANY, INC.
JIM WALTER RESOURCES, INC.
JW ALUMINUM COMPANY
J.W. WALTER, INC.
J.W.I. HOLDINGS CORPORATION
LAND HOLDINGS CORPORATION
RAILROAD HOLDINGS CORPORATION
SLOSS INDUSTRIES CORPORATION
SOUTHERN PRECISION CORPORATION
UNITED LAND CORPORATION
UNITED STATES PIPE AND FOUNDRY
COMPANY, INC.
VESTAL MANUFACTURING COMPANY
WITNESS: WALTER HOME IMPROVEMENT, INC.
WALTER LAND COMPANY
/S/ MARY C. SNOW GANS TRANSPORT AGENCIES (USA), INC.
- ---------------------------
/S/ MARY E. THORN By: /S/ DEAN M. FJELSTUL
- --------------------------- ---------------------------------
Name: Dean M. Fjelstul
Title: Vice President
4
<PAGE>
JIM WALTER COMPUTER SERVICES, INC.
JIM WALTER HOMES, INC.
WITNESS: NEATHERLIN HOMES, INC.
/S/ MARY C. SNOW
- ---------------------------
/S/ MARY E. THORN By: /S/ FRANK A. HULT
- --------------------------- -----------------------
Name: Frank A. Hult
Title: Vice President
WITNESS: JIM WALTER HOMES OF ASHEVILLE, INC.
/S/ MARY C. SNOW
- ---------------------------
/S/ MARY E. THORN By: /S/ RONALD K. ACHILLE
- --------------------------- --------------------------------
Name: Ronald K. Achille
Title: Vice President
5
<PAGE>
NATIONSBANK, NATIONAL ASSOCIATION,
as Agent for the Lenders
By: /S/ ANDREW M. AIRHEART
-----------------------------
Name: Andrew M. Airheart
Title: Senior Vice President
NATIONSBANK, NATIONAL ASSOCIATION,
as Lender
By: /S/ ANDREW M. AIRHEART
-----------------------------
Name: Andrew M. Airheart
Title: Senior Vice President
6
